Cash Flow Statement:A Cash-flow Statement is one that lists the cash-flows of a business over a period of time, usually

the same period as that covered by the Profit & Loss Account. A Cash-flow is any increase or decrease in cash in a business. Cash includes cash in hand and deposits repayable on demand, less overdrafts that are repayable on demand. The management of funds is easier if there is documented information on business performance. The balance sheet shows the asset and liabilities of a business at a point in time. The profit and loss account shows how the year s profit distributed. In 1991, the Accounting standards Board (ASB) published its first Financial report Standard, FRS 1 Cash flow Statement . The new standards required companies to publish a CASH FLOW STATEMENT in the annual accounts. Note that this not the same as a cash flow forecast. Cash flow statements may include receipts and payments from the previous two years. These may not be disclosed elsewhere in published financial statements. Another advantage is the cash flow statement must be shown in a standardized presentation. This allow a comparison between different companies. FRS 1 requires cash flows to be disclosed under standard holdings. These are: y y y y y Operating activities; Returns on investments and servicing of finance; Taxation; Investing activities; Financing.

Why Cash-flow Statements are important?

While it is necessary to know how much profit or loss a business has made, the business does not pay its creditors out of the balance on its Profit & Loss Account. Creditors are paid out of the money a business has at the bank. No business has ever been forced by its creditors to close down because it has made a loss. But a business can be forced to close down because it has insufficient money in the bank to pay its bills when they fall due. The amount by which the ready money in a business exceeds its immediate liabilities is its liquidity. There is a big difference between profit and liquidity. A business may take a big profit but have less money in the bank than at the start of the year. Over period of time a business need to generate cash inflows that at least match its cash outflows. Outflows include: y y y Payment of creditors (as already mentioned) and running costs of carrying on business (e.g. wages etc.) Renewal of, and additions to, fixed assets Interest on loans and debentures

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Payment of tax on profits (companies) Costs involved in the growth of the business (expansions and development) Dividends payable to shareholders, or drawings of sole traders and partners.

Criticisms of cash flow statements:The inclusion of cash flow statements helps to clarify the cash position of a business. However, there are some criticisms of cash flow statements. y y In practice, little new information is shown in the statements. The law encourages disclosure but does not enforce it. Small limited companies are not bound to publish a cash flow statement because they are owner managed. However, Medium sized firms are. This seems to lack a little logic since most medium sized firms are also owner managed. Cash flow statements are based on historical information. It is argued that cash flow statements based on future prediction are more useful.